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The Impact of Fiscal Governance on Bond Markets: Evidence from Late Budgets and State Government Borrowing Costs

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Author Info

  • Asger Lau Andersen

    (Department of Economics, University of Copenhagen)

  • David Dreyer Lassen

    (Department of Economics, University of Copenhagen)

  • Lasse Holbøll Westh Nielsen

    (Department of Economics, University of Copenhagen)

Abstract

Does fiscal governance affect government borrowing costs? We operationalize fiscal governance as the ability of governments to pass a budget on time and, using a unique data set on budget enactment dates, analyze the effect of such late budgets on government bond yield spreads. Based on a sample of 36 US states in the period 1988-1997, we estimate that a budget delay of 30 days has a long run impact on the yield spread between 2 and 10 basis points. States with sufficient liquidity in the form of large reserves face small or no costs from late budgets.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 2010-11.

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Length: 22 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:kud:epruwp:10-11

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Related research

Keywords: fiscal governance; political deadlock; late budgets; fiscal stalemate; Chubb relative value survey; debt cost; bond spreads;

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  1. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  2. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  3. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  4. Mark Hallerberg & Guntram Wolff, 2008. "Fiscal institutions, fiscal policy and sovereign risk premia in EMU," Public Choice, Springer, vol. 136(3), pages 379-396, September.
  5. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 503-532, October.
  6. Asger L. Andersen & David Dreyer Lassen & Lasse Holbøll Westh Nielsen, 2010. "Late Budgets," EPRU Working Paper Series 2010-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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